One of the common questions we get asked by our new clients is “What should I be doing when planning for retirement? I am in my 50s. Am I too late to be planning for my retirement?”
The answer is that it’s never too late to start. For those who are recently retired or indeed nearing retirement, the options with regards to structuring their income in retirement to achieve their own goals may appear more daunting than ever.
How to best structure retirement income is based largely on each individual’s personal and financial circumstances, attitude to risk and principally their specific objectives for retirement.
Those in the best financial position as they approach retirement are often the people who begin planning early, giving consideration to the benefits of being able to draw an income from various tax-efficient sources when they reach retirement itself.
If you are approaching retirement, key options to consider are:
State Pension
For many, the State Pension will provide the basis of their income in retirement. The full new State Pension is £221.20 per week (£11,502.40 per annum), and can currently be claimed when reaching age 66. The State Pension age is scheduled to increase gradually from May 2026, and with many looking to retire in their early 60’s, it is important that consideration is given regarding how to bridge the gap between finishing work and drawing your State Pension.
Your State Pension depends on the number of qualifying years. You will only qualify for a full State Pension if you have 35 years’ worth of National Insurance contributions; you can check your personal projection via the government gateway: Check your State Pension forecast – GOV.UK (www.gov.uk)
Defined Contribution/Occupational Pensions
Following the introduction of auto enrolment in 2012, Defined Contribution pensions have grown in popularity. It is important to review such pensions to ensure you are taking full advantage of the benefits your employer offers (e.g. up to what level will they match contributions, do they offer salary sacrifice etc).
Many employers’ schemes invest in a balanced lifestyle product as standard, which may not be aligned to an individual’s investment timeline or attitude to risk. Reviewing the suitability of such schemes ahead of retirement can be key to ensuring retirement income itself is maximised.
Defined Benefit/Final Salary Schemes
Such schemes provide a guaranteed income for life based on your final or average salary, however many companies have subsequently closed these schemes due to their complexities and high running costs. The terms of each scheme are specific to individual employers, with the benefits to individuals often being very attractive. Depending on your scheme, retirement may be taken from age 55, however taking benefits early may lead to a reduction in income, so options should be considered carefully.
Annuity Purchase
An annuity provides you with a regular, guaranteed income in retirement, and can be bought using some or all of your pension pot which can be paid for life or for a fixed number of years, with guarantee periods, indexation and spousal benefits built in depending on individual circumstances.
Low interest rates and increased life expectancy have caused annuity rates to tumble over recent years, however, one benefit of the current economic climate has been a notable rise in annuity rates over the past couple of years. Benchmark rates have been at some of their highest levels since early 2009, making an annuity a more attractive consideration once again.
ISA
ISAs are a tax-efficient and flexible vehicle that can be used to support taxable pension income in retirement. Regular ISA contributions whilst building towards retirement can make a significant difference to the tax efficiency of retirement income. In the recent Spring Budget, Jeremy Hunt announced a new UK focused ISA tax allowance for savers investing in ‘UK-focused’ shares. We are waiting to learn more details on this from the government.
Venture Capital Trust (VCT)
Particularly attractive for high earners and those already maximising their pension contributions, VCTs provide funding for smaller UK companies, with investments benefiting from income tax relief of 30% and crucially from a retirement income perspective; dividends are received free of income tax.
Review Regularly
Whatever your financial objectives for retirement may be, it is vital to regularly review whether you are on track to achieve these, and if not, what actions can be taken to help ensure your retirement is as long and happy as possible.
The key is to consider your position in advance and take steps to ensure you are on track sooner rather than later. We can provide you with cashflow planning to be able to help advise you on the best way to become financially free to retire without the worry and stress.
If you would like to talk to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk for advice on planning your retirement income strategy.
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority does not regulate estate planning and tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
